Year in Review 2010

A look back at the top 20 stories that affected in-house counsel

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Chunk of Change

Economists declared in September that the recession had been over for 15 months, but inside companies, the effects of the economic crisis continue. Although corporate legal departments may face a reprieve from the ruthless cost-cutting of the past few years, they’re not simply reverting back to the old way of doing things.

“I talk to companies that are a little healthier and maybe don’t have to hit 20 percent cuts this year,” says Susan Hackett, general counsel of the Association of Corporate Counsel. “But once you go into that kind of budget-cutting mode, it’s not like management’s going to come back and say, ‘Well, you can have your 20 percent back, and here’s another 7 percent.’”

Luckily, the budget cuts have equipped in-house counsel with a new set of tools to control spend, including experimenting with new billing structures, developing more collaborative law firm relationships, bringing more work in-house, using legal process outsourcing, and finding better, more efficient ways to track budgets and projects. Hackett shares a conversation she had with the number two in a Fortune 500 law department who was excited his department was now billing 60 percent of its matters on a fixed fee basis.

“How long have you been doing that?” Hackett asked.

“Oh, about a year.”

That’s remarkable speed, she says, for a profession that usually moves “at a glacial pace. This is a tsunami of change.”

And companies that have embarked on new budget-cutting measures and found success have no plans to stop just because the economy is recovering. If 2009 was a year of trying to figure out what was going on and how to handle it, 2010 became the year when law departments took a deliberate look at their spending and goals and developed strategies to align the two. The outcomes weren’t always perfect, Hackett says, but that just may mean that 2011 will bring a better understanding of what strategies work best.

“I’m interested to see what 2011 holds,” she says. “So many clients are finding what they’re doing is really valuable, or that certain law department practices are really transforming the way in-house counsel will manage departments. If 2010 was the year of making deliberate decisions, 2011 might be the year things start shaking out and people start applying theory in terms of in-house departments. What’s next? It will be a very interesting year.”

Health Care Overhaul

Creating what arguably is the most sweeping change in domestic policy since Social Security, a bitterly divided Congress passed health care reform legislation in March. In doing so, it set off a firestorm from critics who claimed it would cost too much and provide too little, create more government intrusion into private lives and jeopardize the financial stability of small and mid-size employers.

On the other side, proponents pointed out that the existing system desperately needs an overhaul. With 50 million uninsured Americans relying on expensive emergency room care, and with health insurance premiums skyrocketing, they argued that Americans are spending more and getting less from their health care system than people in most developed countries. The controversy played a key role in many off-year election races, making it hard to sort out the truth amidst political hysteria.

In fact, companies won’t feel the true impact of the bill–for better or worse–until 2014, when it requires all Americans to have health care coverage. But most companies with health benefit plans must immediately offer coverage for employees’ adult children up to age 26, accept children under age 19 with pre-existing conditions, provide rest breaks and private spaces for breast-feeding mothers to express milk, and offer plans with no lifetime limits on benefits. In 2012, they face new W-2 reporting requirements. By 2014, companies with more than 50 full-time employees will have to decide whether to provide as-yet undefined comprehensive coverage, or pay a fine.

Many of the details are still to be defined. So far, government agencies have issued about 1,000 pages of regulations, a number that is expected to multiply tenfold. Meanwhile, whether the new law will meet the expectations of proponents, or realize the fears of opponents, or be fundamentally changed by the new Congress, remains to be seen.

“Most of those involved in health care from a legal perspective are tremendously interested in the system being reformed for the better,” William Bernstein, a partner at Manatt, Phelps & Phillips, told InsideCounsel in November. “We all hope [the new law] will be a step forward, but the truth is we won’t know for a long time.”

Regulatory Restructuring

As its name implies, the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law July 21, is aimed directly at protecting consumers from deceptive or overly risky practices in the financial services industry. Critics blamed a lack of government scrutiny of such practices for devastating millions of investment and retirement accounts and instigating the mortgage foreclosure crisis. Congress responded by restructuring the industry’s regulatory institutions, eliminating some existing agencies and adding others, including the Bureau of Consumer Financial Protection, which will oversee every entity offering consumer financial products.

While most of the provisions of Dodd-Frank are limited to financial services, some are more far-reaching. The law provides new shareholder rights, including a requirement that public companies hold a nonbinding vote of the shareholders on their executive compensation scheme every three years. Companies also must disclose the median compensation of all employees excluding the CEO, and the ratio of that figure to the CEO’s total compensation.

Of greater concern to many in-house counsel is the act’s whistleblower provision. An employee who gives the SEC original information about any violation of the SEC Act or the Sarbanes-Oxley Act that leads to successful prosecution can receive up to 30 percent of any penalty greater than $1 million. Employment attorneys voiced concern that the financial incentive would spur employees to report suspected violations to federal investigators, bypassing internal compliance systems. With such a big potential payoff, it’s not surprising that soon after the law took effect, plaintiffs lawyers posted Internet ads seeking whistleblowers.

“I’m not a ‘sky is falling’ type, but I’m holding on to the edge of my seat,” Covington & Burling Partner David Martin told InsideCounsel in October. “The act provides great potential for plaintiffs lawyers to drum up business.”

Labor’s Leader

When union attorney Craig Becker took his seat on the National Labor Relations Board (NLRB) in April, many management side labor attorneys warned that the board would try to implement the Employee Free Choice Act (EFCA) through regulation.

EFCA, the top legislative priority of organized labor, would make it much easier for unions to organize workers, but it stalled in the Senate. Republicans, joined by two Democrats, had also succeeded in blocking the appointment of Becker, who had served as counsel for the AFL-CIO and the Service Employees International Union. But President Obama used his power of recess appointment to name Becker and Mark Pearce, a labor lawyer in private practice, to the five-member board, which had been operating with two members for more than a year.

The appointments spurred concern that the NLRB would do what Congress wouldn’t: ease the way for union organizing. Pro-union rule changes could include shortening the election time frame, giving unions more access to potential members in the workplace and allowing off-site voting.

“The business community should be on red alert for radical changes that could significantly impair the ability of America’s job creators to compete,” U.S. Chamber of Commerce Vice President Randel Johnson said in a statement denouncing the recess appointments.

Senate Republicans “have dedicated themselves to a failed strategy to cripple President Obama’s economic initiatives by stalling key administration nominees at every turn,” Reid said in a statement.

As for Becker’s ability to influence the implementation of EFCA-like regulations, he has until the end of 2011, when his recess term expires.

DOL Directives

Labor Secretary Hilda Solis spent 2010 cracking down on employers, with a focus on worker safety, independent contractors and unpaid interns. For example, in the spring 15,000 workplaces with rates of injury and illness higher than the national average received letters from the Department of Labor (DOL). The DOL’s message: Workplace safety is a top priority.

“You’ve got to give them credit, they are not trying to hide anything,” Fisher & Phillips Partner Edwin Foulke, who headed OSHA during the second Bush administration, told InsideCounsel in February. “They are very frank about saying they are focusing on enforcement and rulemaking. They are putting their money where their mouth is.”

A new enforcement initiative known as “Plan-Protect-Prevent” requires employers to involve employees in crafting compliance plans and gives employees the right to use the plan to trigger DOL investigations into violations of OSHA and the Fair Labor Standards Act (FLSA).

A key FLSA enforcement initiative involves the misclassification of workers as independent contractors. In the recession, many companies turned to independent contractors to take the place of workers lost to layoffs, thereby avoiding employment taxes and wage and hour law requirements. As tempting as this may be, employers should be wary; the DOL’s Wage and Hour Division added 90 investigators to address misclassification of employees as independent contractors, and is working with the Internal Revenue Service, which is trying to capture income taxes lost when workers are misclassified.

Unpaid interns can be another convenient way to cut labor costs in the current economic climate, but in April the DOL outlined the requirements for internships to qualify for exemption from federal wage and hour laws. Most do not. In order to pass the test, the intern must benefit more from the experience than does the employer.

Privacy Limits

In the widely followed workplace-privacy case City of Ontario v. Quon, the Supreme Court ruled June 17 that an employer could review employees’ electronic activities if it has a reasonable purpose for the search and limits the search to that purpose.

In 2001, the Ontario, Calif., police department issued alphanumeric pagers to its SWAT team to improve internal communications. The plan allowed a limited number of messages each month. Sgt. Jeff Quon’s superior told him that if he exceeded the limit, he could reimburse the city for overage charges and his account would not be audited.

After Quon continuously exceeded the limit, the department chief contacted the service provider to determine if the overages were work-related; if so, the department would consider increasing the plan’s limit. Transcripts of Quon’s messages revealed the officer had been using his pager for sexually explicit personal messages while on duty.

Quon sued the city and argued that the audit violated his Fourth Amendment rights. He also claimed he had a reasonable expectation of privacy because of his superior’s statements. Ultimately, the Supreme Court ruled that the department’s search was reasonable because it had a clear goal of determining whether to increase the pagers’ messaging capacity. The court did not, however, address whether Quon’s expectation of privacy was reasonable.

As companies revise their tech-related policies for 2011, Quon makes one thing clear: They must define rules and adhere to them to prevent blurred expectations.

“That policy has to be clear, communicated on a regular basis, and [companies] need to be careful that senior employees who may have authority to act on behalf of the company are not giving the policy a wink and a nod,” says Matthew Ingber, partner at Mayer Brown and a columnist for InsideCounsel.com.

Benjamin Shatz, partner at Manatt, Phelps & Phillips, agrees. “Scrupulously following policy is essential: Don’t say one thing and do another,” he wrote in his Aug. 5 column on InsideCounsel.com. Shatz also adds that “the best approach ensures that policies explicitly enumerate all technologies and include catchall provisions.”

Corruption Crackdown

It had all the elements of a Hollywood blockbuster, starting with a global cloak-and-dagger sting. FBI undercover agents posed as emissaries of an African government official seeking bribes in return for gun contracts. The unwitting targets attended a Las Vegas convention where federal officials swooped down on 21 executives and employees of military and police weapons supply companies. On Jan. 19, the Department of Justice described the operation as the largest single investigation of individuals in the history of the Foreign Corrupt Practices Act (FCPA). The Las Vegas arrests–and one later in Florida–demonstrated that small as well as large companies need to scrutinize their foreign business practices.

The stakes are high. In February, British defense contractor BAE Systems pleaded guilty to fraud and conspiracy charges, including lying about its FCPA compliance program. The company agreed to pay the U.S. government $400 million and settled with U.K. regulators for $45 million.

The splashy gun industry arrest, followed by the huge BAE Systems settlement, set the tone for a record year of FCPA enforcement activity. Miller & Chevalier reported that by the end of September, both the DOJ and the Securities and Exchange Commission had exceeded their 2009 totals of FCPA case dispositions. Investigators had another 140 cases underway.

Many of those pending cases involve Big Pharma. The 2010 targets included Merck, Pfizer, Eli Lilly, AstraZeneca, Baxter International, Bristol-Myers Squibb and SciClone Pharmaceuticals, though the government hasn’t yet filed any charges.

“This is likely to be a lengthy, industrywide investigation,” Glen Donath, a partner at Katten Muchin Rosenman, told InsideCounsel in October. “It has the potential to dramatically reconfigure the way pharmaceutical and device companies run clinical trials and market drugs abroad.”

Underprivileged Attorneys

In-house counsel have no “legal professional privilege,” in their communications with their corporate clients, the European Court of Justice (ECJ) ruled in its September decision in Akzo Nobel Chemicals v. European Commission. Specifically, the court ruled that communications are not privileged in European Union competition law cases and investigations.

In Akzo, investigators who raided the company’s U.K. office examined e-mails between an in-house attorney and an Akzo executive. The company argued that the communications should have been protected under attorney-client privilege, but the ECJ disagreed.

The ruling reinforced the court’s 1982 decision in AM & S Europe v. European Commission, which determined that in-house counsel are dependent on the companies they represent as employees and, therefore, cannot exercise the same impartiality that outside counsel provide.

Critics of the ECJ’s decision, including the Association of Corporate Counsel, argue that the ruling is unfair because in-house counsel are bound by the same professional ethics as law firm attorneys and should therefore be afforded the same privilege with their clients.

Ben Heineman, former GC of GE, spoke out against the decision on the Harvard Law School Forum on Corporate Governance and Financial Regulation blog. “The ECJ is oblivious to the importance of talented inside lawyers being part of the corporate culture,” he wrote, “and thus more effective than outside lawyers in embedding compliance systems and processes in business operations to advance the fundamental corporate goals of high performance with high integrity.”

The decision serves as a warning to all in-house counsel practicing within the European Commission’s jurisdiction to be aware of applicable European Union privilege law.

BilskiBusiness

Perhaps the biggest news in the intellectual property world this year came in June when the Supreme Court passed down its long-awaited decision in Bilski v. Kappos. The divided court ruled 5-4 that business methods can, in fact, be patented. Although the decision ultimately reaffirmed the traditional limits on patentability, the court ruled that the business method in Bilski was not patentable, thereby calling many existing business method patents into question.

“A lot of the patent community felt a little let down that the court didn’t provide much guidance on what business methods could be patented and what would or would not constitute an abstract idea,” says Banner and Witcoff Shareholder Brad Wright, who sat in on oral arguments for Bilski. “It was very clear to me and everyone else in the courtroom that Bilski wasn’t going to get his patent, it was just a matter of what rationale [the Court was] going to use.”

Bilski also struck down the Federal Circuit’s bright-line standard machine-or-transformation test, which required a process to be “tied to a particular machine or apparatus” or transform “a particular article into a different state or thing” in order to be patentable. The justices said that while the test is a useful tool in evaluating patentability, it is not the sole test.

The U.S. Patent and Trademark Office (USPTO) has given weight to the test though. The day Bilski was announced, it instructed examiners to apply the machine-or-transformation test to all processes, explaining in a guidance that processes that pass the test are “likely patent-eligible.”

“Businesses applying for business method patents should include in those applications as much hardware and machinery as possible,” Wright says. “If you can fit into the machine-or-transformation test, [the USPTO] is much more likely to issue a patent, and the courts are more likely to uphold it.”

Girl Power

For the first time in history, women represent one-third of the Supreme Court.

Fifty-year-old Elena Kagan, successor to liberal Justice John Paul Stevens, in August joined Ruth Bader Ginsburg and Sonia Sotomayor as the third active female justice and the fourth woman to ever serve on the court.

“Having a Supreme Court that more closely reflects the gender makeup of the population is a very encouraging signal to women at all levels in the [legal] profession,” says Linda Coberly, a partner at Winston & Strawn.

Kagan was a policy adviser and associate counsel to President Bill Clinton, the first female dean of Harvard Law School and the first woman to serve as Solicitor General. However, critics were quick to point out that she is the first justice since former Chief Justice William Rehnquist, appointed in 1972, to join the court without prior judicial experience.

During his May 17 speech announcing her nomination, President Obama lauded Kagan’s “understanding of law, not as an intellectual exercise or words on a page, but as it affects the lives of ordinary people.” He also praised her defense of campaign finance reform in Citizens United v. Federal Election Commission, the first case she argued as Solicitor General.

Although her blurry political leanings may give business cause for concern, it is yet to be seen how Kagan’s judicial philosophy will affect future rulings; she has recused herself from many of the initial cases this term because of her prior involvement in them as Solicitor General.

“In most cases, businesses–like all litigants–are looking for judges who are very smart, analytically careful and fair,” says Coberly. “There is every reason to believe that Justice Kagan has those qualities.”

False Marks

The Federal Circuit’s December 2009 decision in Forest Group, Inc. v. Bon Tool, Co., which changed both the interpretation of the false marking statute and the fines that can be imposed for violating it, opened the floodgates for a wave of false patent marking suits. The language of the statute calls for fines of “not more than $500 for every such offense” and, for years, courts had interpreted an “offense” to be one continuous violation. The Forest Group decision, however, reinterpreted “offense” to refer to each falsely marked article, meaning those hit with false marking suits were at risk of fines in the billions.

Plaintiffs took advantage of the new interpretation and in 2010 filed more than 450 false patent marking suits. However, in Pequignot v. Solo Cup Co., the Federal Circuit made false marking cases easier to defend against.

The decision elaborated on the standard for proving intent to deceive, says Banner & Witcoff Shareholder Binal Patel. The language of the false patent marking statute allows a lawsuit to be brought against anyone who falsely marks a patent “for the purpose of deceiving the public.” The Federal Circuit’s opinion in Solo Cup made it clear that negligence or recklessness alone were not enough to prove liability in false patent marking cases. Plaintiffs must prove intent to deceive–a much tougher standard.

Though courts have imposed limitations on false marking claims, Patel says Congress may step in to redefine the current statute.

“One bill that I’ve heard could move through Congress early next year would mean several changes,” he says. “One is that the accused infringer must actually suffer some kind of competitive injury and the damages that the person can obtain would be limited to the injury that they actually suffered. The statute still has a $500 limit, but only the government could seek that amount. One final aspect is that it would be retroactive to all pending litigation.”

Defense Decision

Part of the federal mail and wire fraud law, the “honest services” statute encompasses schemes or artifices “to deprive another of the intangible right of honest services.” It has been used broadly by federal prosecutors in combating not just misconduct by public officials but also breaches of fiduciary duty by executives at public companies.

But in June, in U.S. v. Skilling, the Supreme Court sharply curtailed the use of the honest services statute as a catchall for prosecuting fraud, ruling that it only applies to cases of bribery and kickbacks and that any broader use makes the law “unconstitutionally vague.”

The case before the court concerned Jeffrey Skilling, former CEO of Enron. The court vacated one count against him, as well as honest services fraud convictions of Conrad Black, former CEO of Hollinger International Inc., and former Alaska state legislator Bruce Weyhrauch. Also called into question by the ruling was the use of the statute in cases against former Illinois Gov. Rod Blagojevich, former Alabama Gov. Don Siegelman and former HealthSouth CEO Richard Scrushy.

Innovative law departments looking for cost savings, predictability and risk-sharing backed away from the billable hour in favor of alternative fee arrangements (AFAs) in 2010. A majority–51 percent–of in-house counsel respondents to Fulbright & Jaworski’s 2010 Litigation Trends survey said they used alternative fee arrangements, up from 45 percent last year.

The survey results reflected how customizable such arrangements can be, with no single billing model emerging as a norm for in-house counsel. Instead they relied on a mix of fixed fees, contingency fees, blended rates, fee caps and other performance- and reward-based fees.

In March, in-house lawyers and law firms shared their billing policies and AFA best practices with InsideCounsel, and reported that moving away from the billable hour led to better budget predictability and stronger, more aligned law firm relationships.

“We have a belief that in most cases hourly rates are destructive and inefficient, and they don’t really equate to value,” Andrew Schaeffer, managing counsel at DuPont, told InsideCounsel. “Just because something takes longer to do doesn’t mean it brings more value to a client. The idea was to come up with alternatives to the straight hourly rate that would align with client’s interest and also promote efficiencies so you would get it done faster.”

Clause and Effect

The Supreme Court took on arbitration clauses in two 2010 cases exploring the scope of the Federal Arbitration Act, with both business-friendly rulings relying on “the foundational FAA principle that arbitration is a matter of consent,” as the majority put it in Stolt-Nielsen S.A. v. AnimalFeeds International Corp.

In the April 5-3 opinion in Stolt-Nielsen, the majority said that where an arbitration clause is silent on the issue of class arbitration, parties in a class action cannot be compelled to submit to arbitration. And in June, in Rent-A-Center, West, Inc. v. Jackson, the 5-4 majority said challenges to entire arbitration agreements can usually be arbitrated, although challenges to a specific agreement to arbitrate the validity of the agreement should be heard by a court.

“They’re taking a pro-arbitration line and enforcing arbitration agreements as they’re written, treating arbitration clauses as a typical contract that requires courts to enforce it as written,” James P. Duffy, a DLA Piper partner, told InsideCounsel in August.

On the anti-arbitration front, the proposed Arbitration Fairness Act of 2009 attempted to invalidate agreements that compel arbitration, on the grounds that “a large and rapidly growing number of corporations are requiring millions of consumers and employees to give up their right to have disputes resolved by a judge or jury.” In June, the Subcommittee on Commercial and Administrative Law discharged it back to the full House Judiciary Committee, where it remained at press time.

In Too Deep

When news broke the night of April 20 about an explosion involving the Deepwater Horizon semi-submersible Mobile Offshore Drilling Unit in the Gulf of Mexico, no one suspected the situation would unfold as it did. But the Deepwater Horizon oil spill–also referred to as the BP oil spill–turned into the largest environmental disaster in U.S. history, resulting in deaths, billions of dollars in losses and myriad lawsuits.

The unit was owned and operated by offshore drilling contractor Transocean and leased by oil and gas company BP. The initial blast killed 11 workers and injured 17 others and began the flow of massive amounts of crude oil–estimated at about 62,000 barrels a day in the beginning–into the Gulf of Mexico. Over the next three months, the oil continued to spill into the waters off the coast of New Orleans. By the time engineers plugged the leak on July 15, an estimated 4.9 million barrels of oil had spilled into the Gulf, devastating the fishing and tourism industries and leaving as yet undetermined damage to the ocean and coastal environments.

Not surprisingly, lawsuits immediately started popping up against both BP and Transocean. By June, more than 200 suits had been filed, including a number of class actions. Most of the suits seek damages for lost income for out-of-work fishermen and owners of resorts and restaurants that lost tourism business. Transocean hired Skadden, Arps, Slate, Meagher and Flom to handle its litigation, while BP employed Kirkland & Ellis.

BP’s management team didn’t go unscathed as a result of the spill. Although the company initially denied rumors its then-CEO Tony Hayward would resign, BP announced in late July that Hayward would be replaced by Bob Dudley, effective Oct. 1. Dudley, the first American to stand at the helm of the British company and a 30-year BP veteran, previously was a managing director and had been managing the spill response efforts.

As of early November, BP estimated the total cost of the spill would be upwards of $40 billion. At press time, BP had only paid $11.6 billion in total costs since the incident. The company still faces ongoing cleanup expenses, compensation claims and possibly a multibillion-dollar fine from the U.S. government.

C-Suite Scandal

Hewlett-Packard Co. has suffered through a tough decade. First, there was the controversial 2002 merger with Compaq, which Dell Inc. founder Michael Dell referred to as “the dumbest deal of the decade.” Not long after it was clear the merger actually was proving to be successful, the company found itself in the news again–this time over the board’s forced resignation of CEO Carly Fiorini in 2005. The following year, the company was confronted with an infamous spying scandal, in which HP’s GC and chairwoman hired a team of independent investigators to spy on board members and journalists to uncover the source of an information leak.

It seemed putting the 2000s behind it and starting fresh in the new decade was in the cards for the information technology giant this year. But there was one more scandal lurking for HP, this one in the form of Mark Hurd, who had replaced Fiorini as CEO in 2005.

On Aug. 6, Hurd, who is married, resigned amid allegations that he sexually harassed Jodie Fisher, a marketing consultant for the company as well as a former actress and reality-television personality. Although HP determined that Hurd did not violate its sexual harassment policy, it did discover that the CEO had falsified expense reports to the tune of $20,000 in an effort to cover up his personal relationship with Fisher. The company also found evidence that Fisher was paid for work she never actually did. Upon his departure, Hurd received $12.2 million in severance and almost $35 million in vested stock.

Few tears were shed by Hurd, however. Exactly one month later, he was named co-president and board member of Oracle Corp. The same day Oracle made the announcement, HP filed suit against Hurd seeking to prevent the move, claiming the former CEO would inevitably reveal trade secrets to Oracle.

But the suit was short-lived. Only a couple of weeks later, HP settled with Hurd, who agreed to give up millions of dollars in stock options but got to keep his position with Oracle. HP issued a statement saying it believed Hurd “will adhere to his obligations to protect HP’s confidential information.”

Game Changer

The Supreme Court’s Jan. 21 ruling in Citizens United v. FEC landed with fanfare and controversy, and the country continued to feel its impact through the midterm elections in November. The 5-4 majority in Citizens United overruled two precedents to strike down provisions of the Bipartisan Campaign Finance Reform Act of 2002, or McCain-Feingold. The ruling said that prohibiting corporations from paying for certain “electioneering communications” in advance of an election infringes on their First Amendment rights.

The majority opinion hinged on corporate personhood, or the concept that corporations are entitled to the same rights as natural persons. The public outcry was immediate: a Washington Post/ABC News poll found that 80 percent of Americans opposed the decision. President Obama expressed his disagreement with the majority, and politicians began crafting legislative fixes. Critics said the decision would open the floodgates of corporate spending in elections.

The midterm elections provided an early barometer. On Oct. 18, as the country was embroiled in congressional campaigning, the non-profit Campaign Finance Institute released a study showing that independent campaign spending by organizations other than political parties was up 73 percent compared to the same period in 2008. The Campaign Media Analysis Group estimated spending on political television ads would hit $3 billion, surpassing the $2.4 billion spent in the 2006 midterms.

Toyota Troubles

Five months passed between the infamous Lexus ES 350 crash (pictured)–which involved the car accelerating uncontrollably and killing all four passengers–and the massive recall of millions of Toyota’s popular vehicles.

The recall was announced Jan. 21. It was the auto giant’s attempt to fix a problem that could cause accelerator pedals to stick even without the presence of floor mats, which Toyota had determined in November 2009 to be the problem. Less than a week later, Toyota widened the recall to include even more of its vehicles, and only a few days after that, on Jan. 29, the company announced a recall of its cars throughout Europe. But in those five months, news reports of accidents and deaths caused by the mysterious acceleration problem had been mounting.

Soon after Toyota announced the recalls, the lawsuits started rolling in, including the first class action suit ever filed against the Japanese automaker. On Jan. 31, two firms–Parker Waichman Alonso and the Becnel Law Firm–joined forces against Toyota. The suit alleges that, as a result of the recalls, Toyota owners lost the use of their vehicles and sustained economic losses and emotional distress. The complaint charged Toyota with breach of implied warranty and negligence, seeking compensatory, punitive and exemplary damages for the plaintiffs.

The following month, Congress subpoenaed former Toyota senior in-house counsel Dimitrios Biller. The company had forced Biller to resign in 2007 after he complained Toyota was covering up known design defects in its cars. Biller had filed suit against Toyota in July 2009 for wrongful termination, but a California court prevented him from going public with the information he had.

“The information … I have regarding Toyota’s deceptive and illegal discovery practices will one day become publicly available,” Biller said in an ABC Nightly News interview in February. “Our judicial system, government and the American people need to know how Toyota operates with total disregard of our laws.”

By May, Toyota paid $16.4 million to U.S. regulators to settle allegations that it was too slow in recognizing and correcting the accelerator problem. Despite an apology by Toyota President Akio Toyoda’s, the PR damage was done.

“People want to see a company take full responsibility, be empathic to the victims and their families and be in control by outlining the problem and how they intend to solve it. They also expect the CEO to be doing all this,” crisis management specialist Ong Hock Chuan told Reuters after Toyoda’s apology. “Toyota seems to have failed on all counts.”

Toyota went on to announce two more recalls in 2010. In May, it recalled its Lexus LS sedans due to a steering system problem, and in October it recalled several Toyota and Lexus models over a potential brake fluid leak.

Despite all the negative press, Toyota announced in early November its third-quarter net income quadrupled over the same period in 2009. Toyota attributed its success to strong sales and cost-cutting measures.

Dangerous Disclosures

In-house counsel continued to take the lead in fighting ongoing attempts by the Financial Accounting Standards Board (FASB) to expand disclosure requirements for loss contingencies. Proposed Financial Accounting Standard 5 (FAS 5) is a slightly diluted revision of a 2008 proposal that also generated a corporate outcry. Even with the changes, public companies still fear the requirement that they disclose the amount of money they’ve set aside for litigation, regulatory matters and settlements. More than 150 corporate legal officers from companies including AT&T, Google and Intel have signed on to a comments letter to FASB circulated by the Association of Corporate Counsel (ACC).

The letter outlines some of the ACC’s major concerns with the proposed rule, including the assertion that disclosing specific accrual amounts for a litigation would expose companies to increased liability and litigation, create a tension concerning waiver of attorney-client privilege and work-product protection, and create a “settlement floor” for plaintiffs. In addition, the letter says, such disclosures “would provide a window into management’s evolving view of the matter and provide plaintiffs’ attorneys with a road map of the company’s litigation strategy.”

On Oct. 28, FASB announced it was backing away from a Dec. 15 effective date and would resume work on FAS 5 in June 2011.

Proper Practices

This year, two cases changed the class action landscape for employers. Although different, the decisions handed down just a few weeks apart in Dukes v. Wal-Mart and Velez v. Novartis Pharma Corp. got the attention of employers and may have prompted legal departments to re-examine their employment practices.

The Dukes case against Wal-Mart centered on class certification. In its decision, the 9th Circuit upheld class action certification for the largest class ever–1.5 million current and former female Wal-Mart employees who claimed the company discriminated against them in pay and promotion opportunities. The decision made it easier for plaintiffs to certify a class and harder for a company to defend itself. It also opened the door for massive class actions against other large employers, though the Supreme Court may weigh in. In August, Wal-Mart petitioned for Supreme Court review, and in October, the plaintiffs filed in opposition. The high court’s decision on granting cert was pending at press time.

In Velez, a federal court handed down the largest ever class action discrimination award. The class of 5,600 current and former female employees of Novartis Pharmaceutical Corp. claimed the company discriminated against them in pay, promotion and pregnancy-related matters. In May, a jury awarded them $3.36 million in compensatory damages and $250 million in punitive damages. Rather than appeal, the company settled the case in July, agreeing to pay up to $152.5 million to class members and to spend an additional $22.5 million to improve complaint processes, personnel oversight and performance assessments.

The cases serve as a reminder to employers to make sure their policies and practices are in line with their equal employment opportunity goals.

“Do what you can to make yourself an uninviting target so people are less inclined to sue you,” Fisher & Phillips Partner Ann Margaret Pointer told InsideCounsel in August. “Once in the target range, you need to use every resource to look at the facts and know what shape you’re in.”

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